Mock Examination Submission Form This front sheet should be attached to your submitted answers Name: Email address: For HTFT Partnership to complete Date received: Marker: Date returned: Overall mark: ACCA P6 Advanced Taxation Mock Examination 2
SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. 4. You should assume that the tax rates and allowances for the tax year 2014/15 and for the financial year to 31 March 2015 will continue to apply for the foreseeable future unless you are instructed otherwise. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions. Income tax Normal Rates % Dividend rates % Basic rate 1 31,865 20 10 Higher rate 31,866 to 150,000 40 32.5 Additional rate 150,001 and over 45 37.5 A starting rate of 10% applies to savings income where it falls within the first 2,880 of taxable income. Personal allowance Personal allowance Born on or after 6 April 1948 10,000 Personal allowance Born between 6 April 1938 and 5 April 1948 10,500 Personal allowance Born before 6 April 1938 10,660 Income limit for age related allowances 27,000 Income limit for standard personal allowance 100,000 Residence Days in the UK Previously Resident Not previously resident Less than 16 Automatically not resident Automatically not resident 16 to 45 Resident if 4 UK ties (or more) Automatically not resident 46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties 91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more) 121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more) 183 or more Automatically resident Automatically resident Child Benefit Income charge Where income is between 50,000 and 60,000, the charge is 1% of the amount of child benefit received for every 100 of income over 50,000. Car benefit percentage The base level of CO 2 emissions is 95 grams per kilometre. % 75 grams per kilometre or less 5 76 grams to 94 grams per kilometre 11 95 grams per kilometre 12 ACCA P6 Mock 2
Car fuel benefit The base figure for calculating the car fuel benefit is 21,700. New Individual savings accounts (NISAs) The overall investment limit is 15,000. Pension scheme limit Annual allowance - 2014-15 40,000 Annual allowance - 2011-12 to 2013-14 50,000 The maximum contribution that can qualify for tax relief without any earnings is 3,600 Lifetime allowance 1,250,000 Up to 10,000 miles Over 10,000 miles Authorised mileage allowances: cars Cap on income tax reliefs 45p 25p Unless otherwise restricted, reliefs are capped at the higher of 50,000 or 25% of income Capital allowances: rates of allowance % Plant and machinery Main pool 18 Special rate pool 8 Motor cars New cars with CO 2 emissions up to 95 grams per kilometre 100 CO 2 emissions between 96 and 130 grams per kilometre 18 CO 2 emissions over 130 grams per kilometre 8 Annual investment allowance Rate of allowance 100% Expenditure limit 500,000 Cap on income tax reliefs Unless otherwise restricted, reliefs are capped at the higher of 50,000 or 25% of income. Corporation tax Financial year 2012 2013 2014 Small profits rate 20% 20% 20% Main rate 24% 23% 21% Lower limit 300,000 300,000 300,000 Upper limit 1,500,000 1,500,00 1,500,000 Standard fraction 1/100 3/400 1/400 Marginal relief Standard fraction x (U A) x N/A ACCA P6 Mock 3
Patent box deduction from net patent profit Net patent profit x ((main rate 10%)/main rate) Value added tax (VAT) Standard rate 20% Registration limit 81,000 Deregistration limit 79,000 Inheritance tax Nil rate band 6 April 2009 to 5 April 2015 325,000 6 April 2008 to 5 April 2009 312,000 6 April 2007 to 5 April 2008 300,000 6 April 2006 to 5 April 2007 285,000 6 April 2005 to 5 April 2006 275,000 6 April 2004 to 5 April 2005 263,000 6 April 2003 to 5 April 2004 255,000 6 April 2002 to 5 April 2003 250,000 6 April 2001 to 5 April 2002 242,000 6 April 2000 to 5 April 2001 234,000 6 April 1999 to 5 April 2000 231,000 Inheritance tax: tax rates Excess Death rate 40% Lifetime rate 20% Inheritance tax: taper relief Years before death Percentage reduction % Over 3 but less than 4 years 20 Over 4 but less than 5 years 40 Over 5 but less than 6 years 60 Over 6 but less than 7 years 80 Capital gains tax Rates of tax Lower rate 18% Higher rate 28% Annual exempt amount 11,000 Entrepreneurs relief Lifetime limit 10,000,000 Rate of tax 10% ACCA P6 Mock 4
National insurance contributions (Not contracted out rates) % Class 1 Employee 1 7,956 per year Nil 7,957 41,865 per year 12 0 41,866 and above per year 2 0 Class 1 Employer 1 7,956 per year Nil 7,957 and above per year 13 8 Class 1A 13 8 Class 2 2 75 per week Small earnings exemption 5,885 Class 4 1 7,956 per year Nil 7,957 41,865 per year 9 0 41,866 and above per year 2 0 Stamp Duty Land Tax Ad valorem duty Rate 150,000 or less (1) Nil 150,001 to 250,000 1% 250,001 to 500,000 3% 500,001 to 1,000,000 (3) 4% 1,000,001 to 2,000,000 (2) 5% 2,000,001 or above (2) 7% (1) For residential property, the nil rate is restricted to 125,000. (2) The 5% and 7% rates apply to residential properties only. (3) The 4% rate applies to all non-residential properties where the consideration is in excess of 500,000. Stamp duty Ad valorem duty Rate Shares 0.5% Rates of interest (assumed) Official rate of interest 3 25% Rate of interest on underpaid tax 3 0% Rate of interest on overpaid tax 0 5% ACCA P6 Mock 5
Question One Your manager has had a meeting with Jeremy and Sarah Turner and has sent you a copy of the following memorandum. To The files From Tax manager Date 1 December 2015 Subject Jeremy and Sarah Turner Background Jeremy and Sarah Turner are married with two children aged six and nine years. Sarah has worked for Antique Wood Ltd, a company that buys, sells and values antique furniture, for four years. Her annual gross employment income is 50,000. Sarah s only other income arises in respect of the assets inherited from her father as set out below. Jeremy is a self-employed cabinet maker whose taxable trading profits after deduction of capital allowances are 29,000 each year. He has no other income. He has not yet completed his self-assessment return for 2014/15, which he normally submits in September, and is not sure when he is going to complete it due to busy work commitments, but he does intend to submit it in electronic format. The investments On 1 March 2015 Sarah inherited UK quoted shares and an investment property in London on the death of her father. The probate values of the assets together with the taxable income generated by them in a full year are set out below. Sarah intends to give either the quoted shares or the investment property to Jeremy with the objective of maximising the family s after tax income. Probate value Annual taxable income Quoted shares 280,000 10,400 Investment property 425,000 18,900 The business Sarah and Jeremy plan to start a business, buying and restoring antique wooden furniture, on 1 April 2016. They will work on the new business in their spare time; Sarah will continue to work for Antique Wood Ltd and Jeremy will carry on with his carpentry business. Sarah s forecast of the income and expenditure of the new business for its first three years, including the cost of equipment, is set out below. These figures do not include the cost of employing Sarah and Jeremy on annual salaries of 8,900 each. Sarah is planning to set up a company to run the business but would consider using a partnership, with profits and losses shared equally between them, if it was advantageous to do so. Year ending 31 March 2017 2018 2019 Sales 26,000 56,000 76,000 Less Cost of materials and overheads Purchase of equipment (14,000) (46,000) (22,000) (26,000) Profit / (Loss) Arising (34,000) 34,000 50,000 Proposed investment in shares Jeremy and Sarah wish to reduce their income tax liability and have heard that it is possible to obtain an income tax deduction for investing in unquoted shares. They do not like the fact that the shares involved are more risky than quoted shares but they are still considering investing 30,000 on 1 January 2015. ACCA P6 Mock 6
Gift to Sarah Sarah's mother Lisa is concerned about her IHT position following the death of her husband. She has decided to sell the family home and gift the cash to various family members. She is proposing to gift 160,000 to Sarah, who will use the cash to purchase a house for her mother to live in, rent free. The annual rental value of the house is 7,200. Tax manager An extract from an email from your manager is set out below. Please prepare a memorandum for me, incorporating the following: (a) (i) Advice as to whether Sarah should give Jeremy the investment property or the quoted shares in order to achieve her objective. I would like you to support your recommendation with relevant calculations based on a complete tax year. Please make sure your calculations are clear and logical. You will need to think about the rates of tax that each of the couple will pay on the extra income. (ii) A computation of the annual income tax saving from your recommendation in (i) above as compared with the situation where Sarah retains both the property and the shares. I would also like you to identify any other tax implications arising from your recommendation. You should consider all relevant taxes. (b) An explanation of the advantages from a tax point of view of operating the new business as a partnership rather than as a company whilst it is making losses. You should calculate the tax adjusted trading loss for the year ending 31 March 2017 for both situations and indicate the years in which the loss relief will be obtained. I don t need you to prepare any other supporting calculations and the cash basis accounting alternative is not to be used. (c) An outline of the ways in which Jeremy and Sarah can reduce their income tax liability by investing in unquoted shares and a reasoned recommendation of the most appropriate form of investment, given their personal circumstances. You don t need to discuss the qualifying conditions applicable to the investment vehicle recommended. (d) An explanation of the income tax and inheritance tax implications for Lisa of giving the 160,000 cash to Sarah her daughter. I believe that Lisa is a higher rate tax payer. (e) Advice for Jeremy about his responsibilities under self-assessment and the consequences of submitting late returns and/or payments. Required: Prepare the memorandum requested by your manager. You should assume today s date is 2 December 2015. Marks are available for the components of the memorandum as follows: (a) (i) Recommendation as to whether Sarah should give Jeremy the investment property or the quoted shares in order to achieve her objective, with supporting calculations based on a complete tax year. (7 marks) (ii) Computation of the annual income tax saving from your recommendation in (i) above as compared with the situation where Sarah retains both the property and the shares. (3 marks) ACCA P6 Mock 7
(b) (c) (d) (e) Explanation of the advantages of operating the new business as a partnership rather than as a company. Advice regarding the most suitable form of investment in unquoted shares. Explanation of the income tax and inheritance tax implications for Lisa of the gift to Sarah. (10 marks) (5 marks) (4 marks) Advice for Jeremy about his responsibilities under self-assessment and the consequences of submitting late returns and/or payments. Additional marks will be awarded for the appropriateness of the format and presentation of the memorandum and the effectiveness with which the information is communicated. (4 marks) (2 marks) You should assume that the income tax rates and allowances for the tax year 2014/15 and the FA2014 apply throughout this question. (Total: 35 marks) ACCA P6 Mock 8
Question Two An extract from an email from your manager is set out below I recently had a telephone conversation with Laura Foxcroft, the managing director of Tay Limited (Tay). She would like to meet with me next week to run through the tax implications of various issues. All the relevant details are disclosed in the attached memorandum. I need you to prepare notes covering the following for me to take to the meeting: (a) (i) A statement, with reasons, indicating whether or not Tay is entitled to claim a tax allowance in respect of the purchased intellectual property. (b) (c) (ii) A calculation of the corporation tax payable by Tay for the year ended 31 March 2015, taking advantage of all available reliefs. (iii) (iv) An explanation of the potential corporation tax implications of Tay transferring work to Trent Limited (Trent). I would also like you to make suggestions as to how these can be minimised or eliminated. Advice on the capital gains implications of the proposed sale of Trent s building with supporting calculations. I also need a brief memorandum to the management board outlining the corporation tax issues that Tay should consider when deciding whether to acquire the shares or the assets of Tagus LDA (Tagus). I don t need you to discuss issues relating to transfer pricing. Could you also draft some notes about the consequences arising from the submission of the incorrect VAT return by Trent. I m sure it was not a deliberate mistake, just an oversight on the part of the company. The memorandum attached to the email is set out below. To From Internal filing Tax Manager Date 1 May 2015 Subject Tay Limited Background Tay Limited Unquoted trading company with a 31 March year end. Acquired 100% of the shares of another company, Trent Limited, on 1 September 2014. Both companies manufacture engine components. Proposed transfer of work Trent Limited has been incurring trading losses for some time, and at 1 January 2014 had tax losses of 300,000 (including 60,000 relating to the year ended 31 December 2013). Tay Limited lacks the capacity to take on more work, so intends to transfer several of its orders to Trent Limited. ACCA P6 Mock 9
By doing this, it is anticipated that Trent Limited will make small profits in the year to 31 December 2015, and even greater profits in subsequent years, thereby utilising its existing corporation tax losses. Trading results The trading results of the two companies (actual and estimated) are as follows: Company Year ended Taxable profits/ (losses) Tay Limited 31 March 2015 250,000 Trent Limited 31 December 2014 (120,000) Intellectual property 31 December 2015 50,000 On 1 January 2015, Tay Limited incurred expenditure of 250,000 on intellectual property. It does not amortise this amount and so has not claimed any tax relief for the expenditure. Proposed sale of building Trent Limited owns an old building, which was purchased in September 2005. This building has always been used for the purposes of Trent Limited s trade. The building cost Trent Limited 400,000, and was valued at 300,000 when Trent Limited was acquired by Tay Limited. The building is currently worth 250,000. Tay Limited is planning to sell a capital asset in September 2015, which will realise a chargeable gain of 75,000 and has recently suggested that Trent Limited sell the old building at the same time in order to take advantage of the capital loss that would arise. Acquisition of Tagus LDA Tay Limited has recently identified an opportunity to purchase either the shares or the assets of Tagus LDA, an engineering company based in Portugal, an EEA country. It is considered that the business of Tagus LDA will remain Portuguese resident irrespective of which acquisition route is taken. Portuguese companies and businesses pay tax on profits at the rate of 20 5%. VAT error A recent investigation by Trent Limited of their accounting records has revealed an error in the value added tax (VAT) return submitted for the quarter to 31 March 2015. Although input VAT has been correctly calculated at 40,000, the output VAT stated as 87,500 has been under declared by 55,000. The additional VAT due has not yet been paid. ACCA P6 Mock 10
Required: Prepare the notes requested by your manager. You should assume today s date is 3 May 2015. (a) (b) (c) Marks will be given for the four different components as follows: (i) The tax allowance available in respect of the purchased intellectual property. (2 marks) (ii) Calculation of corporation tax (CT) payable by Tay Limited for the year ended 31 March 2015 (3 marks) (iii) (iv) Explanation of the potential corporation tax (CT) implications of Tay Limited transferring work to Trent Limited Advice on the capital gains implications of the sale of Trent Limited s old building (3 marks) (4 marks) Draft the memorandum to the board regarding the acquisition of the shares or the assets of Tagus LDA. (10 marks) Prepare the notes setting out the tax consequences arising from the submission of the incorrect value added tax (VAT) return. (3 marks) You should assume that the tax rates and allowances for Financial Year 2014 will continue to apply for the foreseeable future. (Total: 25 marks) ACCA P6 Mock 11
Question Three Stuart is a self-employed business consultant aged 58. He is married to Rebecca, aged 55. They have one child, Sam, who is aged 24 and single. In November 2014 Stuart sold a house in Plymouth for 422,100. Stuart had inherited the house on the death of his mother on 1 May 2001 when it had a probate value of 185,000. The subsequent pattern of occupation was as follows: 1 May 2001 to 28 February 2002 occupied by Stuart and Rebecca as main home 1 March 2002 to 31 December 2005 unoccupied 1 January 2006 to 31 March 2008 let out (unfurnished) 1 April 2008 to 30 November 2009 occupied by Stuart and Rebecca 1 December 2009 to 30 November 2014 used occasionally as second home Both Stuart and Rebecca had lived in London from March 2002 onwards. On 1 March 2008 Stuart and Rebecca bought a house in London in their joint names. On 1 January 2010 they elected for their London house to be their principal private residence with effect from that date, up until that point the Plymouth property had been their principal private residence. No other capital disposals were made by Stuart in the tax year 2014/15. He has 29,500 of capital losses brought forward from previous years. Stuart intends to invest the gross sale proceeds from the sale of the Plymouth house, and is considering two investment options, both of which he believes will provide equal risk and returns. These are as follows: Notes: (1) acquiring shares in Omikron plc; or (2) acquiring further shares in Omega plc. 1 Omikron plc is a listed UK trading company, with 50,250,000 shares in issue. Its shares currently trade at 42p per share. 2 Stuart and Rebecca helped start up the company, Omega plc, which was then Omega Ltd. The company was formed on 1 June 1996, when they each bought 24,000 shares for 1 per share. The company became listed on 1 May 2003. On this date their holding was subdivided, with each of them receiving 100 shares in Omega plc for each share held in Omega Ltd. The issued share capital of Omega plc is currently 10,000,000 shares. The share price is quoted at 208p 216p with marked bargains at 207p, 211p, and 215p. ACCA P6 Mock 12
Stuart and Rebecca s assets (following the sale of the Plymouth house but before any investment of the proceeds) are as follows: Assets Stuart Rebecca Family house in London 450,000 450,000 Cash from property sale 422,100 Cash deposits 65,000 65,000 Portfolio of quoted investments 250,000 Shares in Omega plc see above see above Life insurance policy The life insurance policy will pay out a sum of 200,000 on the death of the first spouse to die. Stuart has recently been diagnosed with a serious illness. He is expected to live for another two or three years only. He is concerned about the possible inheritance tax that will arise on his death. Both he and Rebecca have wills whose terms transfer all assets to the surviving spouse. Neither Stuart nor Rebecca has made any previous chargeable lifetime transfers for the purposes of inheritance tax. Required: (a) Calculate the taxable gain on the sale of the Plymouth house in November 2014. (b) (c) (d) (7 marks) Given his recent diagnosis, advise Stuart as to which of the two proposed investments (Omikron plc/omega plc) would be the more tax efficient alternative. Give reasons for your choice. Assuming that Stuart: (i) purchased 201,000 shares in Omega plc on 3 December 2014; and (ii) dies on 20 December 2016, (3 marks) calculate the potential inheritance tax (IHT) liability which would arise if Rebecca were to die on 1 March 2017, and no further tax planning measures were taken. Assume that all asset values remain unchanged and that the current rates of inheritance tax continue to apply. (7 marks) Advise on any lifetime inheritance tax (IHT) planning that could be undertaken in respect of both Stuart and Rebecca to help reduce the potential inheritance tax (IHT) liability calculated in (c) above. (3 marks) (Total: 20 marks) ACCA P6 Mock 13
Question Four Assume today s date is 15 May 2015. In March 2009, Bob was made redundant from his job as a furniture salesman. He decided to travel round the world, and did so, returning to the UK in May 2011. Bob then decided to set up his own business selling furniture. He started trading on 1 October 2011. After some initial success, the business made losses as Bob tried to win more customers. However, he was eventually successful, and the business subsequently made profits. The results for Bob s business were as follows: Period Tax Trading Profits/(losses) 1 October 2011 30 April 2012 3,500 1 May 2012 30 April 2013 (18,000) 1 May 2013 30 April 2014 41,040 In 2014/15, Bob required additional funds for his business, so he raised money in three ways: (1) Bob is a classic car enthusiast and he has collected a number of cars over the last 20 years as well as having acquired a number by inheritance. To raise money he sold a number of pieces from this collection. Each one raised between 4,000 and 6,000. He obtained the sales by creating a website and advertising the cars. Bob has not declared these transactions as income, as he believes that the proceeds from selling the cars are nontaxable. (2) He disposed of two paintings and an antique silver coffee set at auction, realising chargeable gains totalling 24,120. (3) Bob took a part time job in a furniture store on 1 January 2013. His annual salary has remained at 12,790 per year since he started this employment. Bob has 5,000 shares in Willis Ltd, an unquoted trading company based in the UK. He subscribed for these shares in August 2010, paying 3 per share. On 1 December 2014, Bob received a letter informing him that the company had gone into receivership. As a result, his shares were almost worthless. The receivers dealing with the company estimated that on the liquidation of the company, he would receive no more than 10p per share for his shareholding. He has not yet received any money. Required: (a) (b) Advise Bob on whether or not he is correct in believing that his car sales are non-taxable. Your advice should include reference to the badges of trade and their application to this case. ACCA P6 Mock 14 (8 marks) Assuming that the income from the sale of the cars is not treated as trading income, calculate Bob s taxable income and gains for all relevant tax years, using any loss reliefs in the most taxefficient manner, and quantify the tax saved.
Your answer should include an explanation of the loss reliefs available and your reasons for using (or not using) them. Assume that the rates and allowances for 2014/15 apply throughout this part of the question. (12 marks) (20 marks) ACCA P6 Mock 15
Question Five Delia Jones, aged 42, has been running a successful restaurant business as a sole trader since 1 September 2004. She has recently accepted an offer from Fastfood Ltd, an unconnected company quoted on the Alternative Investment Market, to purchase her business. Fastfood Ltd would like to complete the purchase on 31 March 2015, but are prepared to delay until 30 April 2015 should this be beneficial for Delia. The purchase consideration will consist of either cash or ordinary shares in Fastfood Ltd. The following information is available: (1) Delia s tax adjusted trading profits are as follows: Year ended 31 August 2013 65,400 Year ended 31 August 2014 77,200 Period ended 31 March 2015 (forecast) 58,500 April 2015 (forecast) 9,000 The figures for the years ended 31 August 2013 and 2014 are adjusted for capital allowances, whilst those for the period ended 31 March 2015 and for April 2015 are before taking account of capital allowances. Delia has overlap profits brought forward of 24,200. (2) The forecast market values of Delia s business assets at both 31 March 2015 and 30 April 2015 are as follows: Goodwill 125,000 Freehold property (A) 462,000 Freehold property (B) 118,000 Fixtures and fittings 240,000 Net current liabilities (95,000) 850,000 Freehold property (A) cost 230,000 in 2004. Freehold property (B) was purchased during June 2012 for 94,000. The goodwill has a nil cost. ACCA P6 Mock 16
(3) The tax written down value of the fixtures and fittings at 31 August 2014 was 114,000. Fixtures and fittings costing 31,000 were purchased on 15 December 2014. All of Delia s fixtures and fittings qualify as plant and machinery for capital allowances purposes, and are being sold for less than original cost. (4) Delia has unused capital losses of 12,400 brought forward from 2013/14. (5) Delia currently has no other income or outgoings. Her investment income will be 45,000 p.a. for 2015/16 onwards, regardless of whether the consideration is taken as cash or shares. (6) Delia will not become an employee or director of Fastfood Ltd. If the consideration is in the form of shares in Fastfood Ltd, then Delia s holding will represent 7.5% of the company s share capital. Delia will sell the shares at regular intervals over the next ten years. (7) Both Delia and Fastfood Ltd are registered for VAT. Required: (a) (b) Assuming that the business is sold on 31 March 2015 with the consideration being wholly in the form of cash: (i) Calculate Delia s trading income assessment for 2014/15. (ii) Calculate Delia s CGT liability for 2014/15. (iii) Advise Delia of the VAT implications arising from the sale. Advise Delia as to the income tax, CGT and NIC implications of: (i) Delaying the sale of the business until 30 April 2015. You should assume that the tax rates and allowances for 2014/15 apply throughout. (5 marks) (6 marks) (2 marks) (7 marks) (Total: 20 marks) ACCA P6 Mock 17